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This study investigates the relative impact of money supply and government expenditure on economic growth in Nigeria. In order to achieve the objectives, we proposed and specified models with parameters, which were estimated and used to test the hypothesis on relative impact of money supply vis-à-vis government expenditure. The Beta Coefficients techniques were employed to analyze the data. The empirical result showed that the impact government expenditure are relatively more effective compared with money supply on economic activities. That government expenditure impact more significantly and stably on economic activities than money supply. During the economic/financial meltdown, it is of note that government expenditure also impact more significantly than money supply in stabilizing economic activity and aggregate output (GDP). The emphasis on fiscal action of the government has led to greater distortion in the Nigerian economy. The role of fiscal policy can be more effective for enhancing economic growth by eliminating corruption, leakages of resources and inappropriate use of resources. However, the combination and harmonization of both money supply and government expenditure are highly recommended.



Title                                                                                                      Page

Title Page                                                                                                 i

Certification                                                                                            ii

Dedication                                                                                               iii

Acknowledgements                                                                                  iv

Abstract                                                                                                   v

Table of Contents                                                                                   vi-viii

List of Tables                                                                                           ix



  • Background to the Study         1
  • Statement of the Problem         4
  • Objectives of the Study         7
  • Research Hypothesis                   7
  • Significance of the Study         8
  • Scope of the Study                                                                       10
  • Organization of the Study.         10
  • Stylized Facts on Monetary and Fiscal Policies in Nigeria 11



2.1    Conceptual Issues                                                                         20

2.2    Review of Theoretical Literature                                                 26

2.3    Empirical Literature                                                                      35

2.4    Theoretical Framework.                                                               48



3.1    Research Methodology                                                                 53

3.2    Sources of Data                                                                             54

3.3    Model Specification                                                                     54

3.4    Estimation and Evaluation Procedures                                       56



4.1    Data Analysis                                                                                58

4.2    Presentation of Results                                                                 59

4.3    Hypothesis Testing                                                                       61

4.4    Interpretation of Results                                                               63

4.5    Policy Implications of Findings.                                                 69




5.1    Summary of Major Findings                                                        73

5.2    Conclusion                                                                                    76

5.3    Policy Recommendations                                                             77

5.4    Limitations and Suggestions for Future Studies.                       79


References                                                                                               81

Appendix                                                                                                 91








1.1    Trend of Monetary Policy (1960-2000)                                     13

1.2    Trend of Fiscal Policy (1960-2000)                                  17

4.1    Summary of Unit Root Test                                               59

4.2    Summary Beta Coefficient                                                 61


















  • Background to the Study

Macroeconomic policy management in Nigeria is dominated by monetary and fiscal policies. Other policies include income, prices, employment, trade, industrial etc. Money supply and government expenditure are two cardinal tools of monetary and fiscal policies respectively. Generally, both monetary and fiscal policies seek to achieve relative macroeconomic stability. The objectives of monetary and fiscal policies in Nigeria are wide-ranging. These include increase in gross domestic product (sustainable growth ), reduction in the rate of inflation and unemployment, improvement in the balance of payment, accumulation of financial saving and external reserves as well as stability in exchange rate.


Sustainable economic growth and development is undoubtedly, one of the most challenging development issues in third world countries today. Even from the days of father of Economics, (Adams, 1992), the main focus of macroeconomic thinkers and policy makers is how to attain macroeconomic stability. In Nigeria, especially before SAP, there had been an undue emphasis on the use of fiscal policy at the expense of monetary policy (Darrant, 1984) which is frequently breached. It was in 1987, after SAP that emphasis shifted to monetary policy following the wake of deregulation of money market which prevents money becoming a major source of disturbance in the Nigeria economy. Today, fiscal and monetary policies are inextricably linked in macroeconomic management as developments in one sector directly affect developments in the other.


Moreover, there are consensuses among economists that monetary and fiscal policies, jointly and individually affect the level of economic activities. The degree and relative superiority of one instrument over the other in achieving these objectives has been subject of debates and controversies among policy makers and economists; tentative resolutions are attempted empirically for different countries and different periods and circumstances. The policies have been a subject of debate between the monetarists and Keynesians. The monetarists led by Milton Friedman believed that money supply exerts greater impact on economic activities while the Keynesians led by John Maynard Keynes believed that government expenditure rather than money supply exerts greater influence on economic activities.


Money supply which affects output, income and prices as well as the balance of payments is therefore, the central piece of monetary tools and intermediate target of monetary policy. In theoretical terms, it is denoted as M1 or M2, narrow and broad definition of money respectively. Government expenditure is the main tool of fiscal policy. It can be financed from direct and indirect taxes, monetization of foreign exchange earnings, and domestic credit from the banking system including ways and means of advances by the central bank and borrowing from non-bank public. On the user’s side, disbursement of these funds could be informed by current or capital expenditure which is broken down further into smaller subheads.


Since the late 1960s, fiscal policy has become a major instrument in Nigeria. The reasons for these are not inconsiderable. First is the domestic role of the public sector in major (formal) economic activities in Nigeria. This can be traced to several factors. Among them are oil boom in early 1960s, the need for reconstruction after the civil war, the industrialization strategy adopted at the time (import substitution industrialization policy) and the militarization of governance. The second reason for the increasing dominance of fiscal policy in the management of the economy is the fall in the international price of oil in the late 1980s. Furthermore, the persistent fiscal deficit since the early 1960s and role of underwriting CBN treasury securities to commercial agents as also influenced the dominance of fiscal actions. Government subsequently opted for discount houses which specialized agency focusing mainly on this function.


Another cause of the declining local capacity utilization has the fierce competition from foreign firms under the spirit of liberation which is a cardinal principle of SAP. Poor macro infrastructure, despite the huge oil rents the country has earned thus far has made it difficult for indigenous firms to complete globally. Most indigenous firms are required to make capital investments in basic infrastructure like roads, securities, water and electricity. The result of such huge outlay is that the indigenous firms are greatly disadvantaged when competing in a global world.


Admittedly, government has, despite SAP sometimes imposed high tariffs on some imported goods and sometimes banned them out rightly. The utility value of such is however suspected. Without necessary support infrastructure and conducive environment for sustainable economic development to take place, infant industry protection will be of little consequence.


1.2    Statement of the Problem

The direction of monetary policy and in particular, the emphasis onmore relevant and effective instruments came in the wake of deregulation of money market beginning from 1987, monetary policy from then onwards laid greater emphasis on preventing money from becoming a major source of disturbance in the economy. Excessive money supply were being tackled at all costs, hence the recourse to stabilize securities among other instruments.


Today, money supply and government expenditure are both commonly accorded prominent roles in the pursuit of macroeconomic stabilization in developing countries but the relative importance of both has been a serious debate between the Keynesians and the monetarists. The monetarists believe that money supply exerts greater impact on economic activities while the Keynesians believe that government expenditure rather than the money supply exert greater influence on economic activities. Giving the fact that both money supply and government expenditure have great impact on economic growth, it is not surprising that they are entwined. Fiscal and monetary policies are inextricably linked in macroeconomic management, development in one sector directly affect developments in other. Undoubtedly, fiscal policy is central to the health of any economy, as government’s power to tax and to spend affects the disposable income of citizens and corporations, as well as the general business climate. In this regard, the interrelationship between public spending and private sector performance is of paramount importance.


On one hand, government expenditure can provide an impulse for private sector growth, while on the other hand, it can be harmful if it results in budgets deficits and leads to competition for scarce financial resources from the banking sector as the government seeks to finance the deficits. In such circumstances, the crowding out of the private sector by the government sector outweighs any short term benefits of an expansionary fiscal policy. The key to all these, therefore, lie in striking a good balance in the fiscal management. Having enough expenditure outlays to meet the needs of government and support growth but not so much as to deny the private sector the resources it need to invest and develop.


The problem is that poor management of money supply and government expenditure will lead to increase in general price level, high unemployment rate, balance of payment deficit, unequal distribution of income, poverty etc.

The research questions emanating from the study are:

  1. Do expansionary monetary and fiscal policies cause inflation in the economy?
  2. Do these policies-induced changes in money supply affect theeconomy?
  3. Does increase in government spending have a positive impact on the level of output?
  4. Does complementary use of monetary and fiscal policies lead to policy conflict?


1.3    Objectives of the Study

The broad objective of this study is to empirically investigate the relative impact of money supply and government expenditure on economic growth in Nigeria.

The specific objectives are to:

  1. Examine the effect of money supply on the level of output
  2. Investigate the impact of government expenditure on economic growth in Nigeria economy
  3. Determine whether complementary use of money supply and government expenditureenhance the realization of macroeconomic objective of economic growth
  4. Examine which of the instruments, money supply or government expenditure proofs more potent in cushioning the effects of global financial crisis.


1.4    Research Hypothesis

For the purpose of this study, the following hypotheses are developed and will be tested in due course:

  1. H0: Money supply is not effective in managing Nigerian economy

H1: Money supply is effective in managing Nigerian economy

  1. H0: Government expenditure is not effective in managingNigerian economy

H1: Government expenditure is effective in managing Nigerian economy

  • H0: Complementary use of money supply and government expenditure do

not enhance the achievement of macroeconomic economic objective of


H1: Complementary use of money supply and government expenditure do

Enhance the achievement of macroeconomic economic objective of


  1. H0: Government expenditure is not effective in cushioning the effects of the

Global financial crisis

H1: Government expenditure is more effective in cushioning the effects of

The global financial crisis.


1.5    Significance of the Study

The key function of government is to protect and promote the welfare of its citizens. In doing this, the government must choose the economic approach to pursue. It may, for instance, decide to pursue a control economic approach, a free market economic approach or synthesis of both monetary and fiscal policies play a key role in the promotion of the main government objectives of promoting the welfare of its citizens.


There has been quite a lot of research work on the impact of monetary policy and fiscal policyon economic growthin Nigeria with special reference to money supply and government expenditure. Notable authors has been seen in the literature: Ajayi (1974), Aigbokhan (1985), Familoni (1989), Olaoye and Ikhide (1995), Asogu (1998), Ajisafe and Folorunso (2002), Ogunmuyiwa and Ekone (2000), Adefeso and Mobolaji (2000)  among others. This shows an indebt study of monetary and fiscal policies as instruments use in macroeconomic management in Nigeria. Most of the studies centered on policy management and impact on the economy.


This study is desirable because it attempt to establish whether or not the money supply and government expenditure is more potent in stabilizing the economy during the global economic meltdown using econometric technique. The major importance of this study is to review and update previous studies especially in this era of continuous monetary and fiscal policies changes and giving the desire to achieve price stability and growth. The previous studies could not cover the period of major policy reforms in the banking sector by the present administration especially on the monetary policy and the current global economic crisis. Investigating the impact of these policies instruments on the macroeconomic management is considered crucial; findings will provide a basis to justify or otherwise such policy management changes.


1.6    Scope of the Study

The relative impact of money supply and government expenditure oneconomic growthin Nigeria will be examined by breaking the period covered in this study into two for the purpose of inter-temporal comparison. The time series properties of the variables will be investigated using annual series data from period 1960-2000. This periodization is in inconsonance with the country’s monetary and fiscal policies changes.


It is expected that information of this study will guide the operators of the Nigerian economy on which of thepolicies (monetary or fiscal) instrumentsis more potent in achieving macroeconomic objectives like price stability, reduction of unemployment rate, economic growth, equitable distribution of income, balance of payment, etc.


1.7    Organization of the Study

This study is structured into five chapters including the introduction as chapter one, chapter two is literature review, chapter three is methodology, chapter four is empirical analysis and chapter five is summary of major findings, conclusion and recommendations.


  • Stylized Facts on Monetary and Fiscal Policies in Nigeria

Consider monetary policy through open market operations which begins with central bank buying a quantity of treasury securities from the commercial banks and other authorized dealers. The banks consequently acquire excess reserves and expand their lending and so the money supply expands. To a monetarist, the lending activity itself generates spending the upward pressure on the security prices provides capital gains to be spent or invested. Either way, as money supply increases, income and output also increase depends on how responsive consumption and investment are, in real terms, to change in interest rates. If investments are interest – elastic or respond quickly, then the effects will tend to be large via the investment multiplier. The implication of this is that the elasticity of the money supply in the money and the investment schedules is crucial in accessing the role of money supply.


It is posted that the discrepancy between money supply and money demand comes about in two ways, namely, direct printing of money by central bank or through the use of any of the monetary control techniques. The direct printing of the money increases money supply, while the use of tools of monetary controls affects the volume of bank reserves setting in motion the machinery of portfolio adjustment on the part of the banks. This concerns particularly their credit-creating ability which leads to change in money supply.


Through the multiple expansionary policies leading to increase in money supply leads to portfolio and credit effects. The portfolio effect comes about through substitution of other financial assets to rid excess money balance. Attempt to buy other financial assets pushes up their price, depressing their yield (or rate of interest). The credit effect occurs through attempt by commercial banks to adjust their lending policy in the light of change reserves. Increased reserves tend to create more credit effects work or to press or decrease the rate of interest.


The monetarist transmission mechanism is based on the hypothesis that money is not just a close substitute for the small class of financial assets but rather a substitute for a large spectrum of financial and real or physical assets. Thus if the central bank through its open market operation (purchases of government securities) increase money supply, sellers will want to rid themselves of excess money balance since their desired and contend that if sellers were individuals who deposit proceeds in the bank accounts, bank reserves will increase and hence banks’ ability to create credit.


Table 1.1  Trend of Monetary Policy (1960-2000)

1970 7 41.9 48.1 18.5
1971 7 42.7 6.5 15.7
1972 7 25.2 16.6 16.9
1973 7 19.8 25.3 17.6
1974 7 28.3 54.5 12.5
1975 6 72.9 80.3 19.7
1976 6 47.4 39.2 22.2
1977 6 54.5 33.8 25.1
1978 7 18.5 1.1 23.1
1979 7.5 19.7 28.0 24.4
1980 7.5 38.1 47.7 30.4
1981 7.75 29.7 7.0 33.9
1982 10.25 20.1 12.0 36.9
1983 10 5.4 17.2 39.3
1984 12.5 5.4 11.9 39.2
1985 9.25 9.6 12.4 38.7
1986 10.5 29.4 4.2 39.6
1987 17.5 19.6 22.9 32.0
1988 16.5 16.4 35.0 32.7
1989 26.8 16.4 3.5 21.7
1990 25.5 19.4 45.9 25.7
1991 20.1 18.7 27.4 28.0
1992 29.8 90.0 47.5 24.2
1993 18.32 19.5 53.8 29.0
1994 21.0 58.1 34.5 29.7
1995 20.18 40.0 19.4 16.5
1996 19.74 23.3 22.5 13.7
1997 13.54 22.6 10.1 15.3
1998 18.29 16.6 22.3 19.4
1999 21.32 22.2 33.1 21.9
2000 17.98 30.9 48.1 22.6
2001 18.29 43.5 27.0 27.8
2002 24.85 11.8 21.6 23.1
2003 20.71 26.8 24.1 23.4
2004 19.18 26.6 14.0 19.8
2005 17.95 30.8 24.4 19.3
2006 17.26 32.1 53.6 21.7
2007 16.94 90.8 44.2 28.1
2008 15.14 59.4 43.6 37.7
2001 18.36 26.6 -9.4 43.6
2000 20.25 24.7 -5.8 50.4

Source: Central Bank of Nigeria.


In 1960s, the average money supply into the economy by the Central Bank of Nigeria was 33.3 percent while in 1980s, the money supply fall to 17.4 percent and the percentage of money supply to GDP in 1960s was 17.8 percent and it experienced an increase in 1980s. Interest rate was 6.75 percent in 1960s while in 1980s, there was an increase in interest rate to 47.7 percent which is equivalent to 12.9 percent. This increase in interest rate was attributed to the fall in credit to the economy in 1980s. In 1960s, credit to the economy was 37.1 percent and in 1980s, it falls to 19.0 percent.


Consequently, 1990s experienced an increase in money supply, interest rate, percentage of money supply to GDP and credit to the economy. This can be attributed to the economic reform of Obasanjo’s administration. The share of money supply to the GDP was 22.34 percent. In 2000s, the fall in money supply was as a result of high inflationary rate in the economy. Interest rate also fell to 18.6 percent, which reduced the cost of credit and increase the percentage of credit to the economy to 37.9 percent.


Fiscal policy is characterized by an increase in government expenditure, which could be financial by issuing of bonds, printing money and by increase taxes. Pure fiscal policy in the conventional model assumes that government finances its expenditure through borrowing from the public after exhausting the revenue. However, the model of deficit financial has important implication on the overall effectiveness of fiscal or monetary policy.


Government expenditure, as earlier noted, can be financed either through budget deficit, tax revenue including foreign earnings, from tariffs, import duties, royalties, company taxes etc, or through credit from the banking system including ways and means advances from central bank or public  debt (domestic and external loans). Each mode of financing government expenditure may have different consequences depending on how it affects the real output sector, the money supply and balance of payment. The point to note is that government expenditure however plays a cardinal role in the fiscal actions depending on the method that government uses to finance its spending.


From the above analysis, it had been noted that there is some consensus that money supply and government expenditure, the two key instruments of monetary and fiscal policy, significantly affect economic activities. However, there is a considerable amount of agreement about the relative impact of these actions. It was also noted that basic macro-static and dynamic analysis of the relative effectiveness of these instruments, based on the Hicksian IS-LM framework reveal that change in the government expenditure, representing fiscal policy, is completely effective in Keynesian or liquidity trap region, where the demand for money is perfectly interest elastic, some that effective is the neo-Keynesian region (i.e. positive slope LM curve) where the demand for money exhibit an interest elasticity (which is positive and finite) and completely ineffective in the classical region in which LM curve is vertical  and the demand for money is perfectly interest inelastic.


The effectiveness of money supply is the reverse of that of government expenditure in the liquidity trap that is; money supply is completely ineffective in the liquidity trap but fully effective in the classical or vertical LM region, and how effective in the intermediate neo-Keynesian region. This region, which is that situation of most economics, calls for monetary-fiscal mix.


Table 1.2  Trend of Fiscal Policy (1960-2000)

1970 62.5 -40.6 -327.8 -8.62
1971 10.3 160.4 -137.7 2.58
1972 46.8 20.2 -134.3 0.82
1973 4.4 20.7 -382.5 1.92
1974 79.2 167.6 981.5 9.54
1975 116.8 21.5 -123.8 -1.99
1976 32.2 22.7 154.9 -4.09
1977 12.3 18.9 -28.4 -2.48
1978 -9.3 -35.6 261.1 -8.17
1979 -93 71.3 -151.8 3.48
1980 102.1 46.5 -235.1 -3.48
1981 -23.8 -42.2  97.6 -8.19
1982 4.5 -22.5 56.4 -12.44
1983 -19.2 7.8 -44.9 -6.34
1984 3.0 15.9 -20.9 -4.46
1985 31.4 37.6 14.3 -4.48
1986 24.4 -20.3 171.6 -11.94
1987 35.7 102.4 -28.6 -5.60
1988 26.0 -3.4 106.5 -8.74
1989 47.9 66.1 24.5 -6.98
1990 46.9 47.3 46.1 -8.27
1991 10.4 -19.19 61.7 -11.45
1992 39.4 72.8 10.6 -7.42
1993 152.0 136.7 172.5 -15.75
1994 -31.2 -28.1 -34.8 -7.81
1995 54.6 175.6 -101.4 0.05
1996 35.6 47.9 3,104.9 1.19
1997 27.0 14.6 -115.6 -0.18
1998 13.8 -16.4 2,567.8 -4.92
1999 94.6 -81.3 113.7 -8.92
2000 -20.0 -9.9 -63.3 -2.26
2001 45.2 33.4 -11.0 -4.68
2002 0.01 -10.1 36.4 -4.68
2003 20.4 42.8 -32.7 -2.39
2004 16.3 22.5 -14.9 -1.51
2005 27.8 32.5 -6.5 -1.11
2006 6.4 10.6 -37.2 -0.55
2007 26.5 27.1 15.6 -0.57
2008 32.2 64.5 -59.6 -0.20
2001 6.7 -17.1 1,609.7 -3.28
2000 6.3 -10.6 -70.7 -2.54

Source: Federal Ministry of Finance & Central Bank of Nigeria.


The trend of government expenditure in 1960s was 34.6 percent; this was attributed to the increase in expenditure of the military regime on the civil war. But the expenditure fell to 23.2 percent in 1980s at the advent of the democratic rule and a reduction in expenditure byBuhari/Idiagbon regime with the introduction of Structural Adjustment Programme (SAP) by Babangida regime. In 1990s, the trend also fell to 10.8 percent and in 2000s, it rose to 15.6 percent because of the persistent deficit financing been implemented by the government which has led to structural inflation.


The revenue was at 42.7 percent in 1960s. This was majorly attributed to the discovery of crude oil in Nigeria and high foreign exchange earningsfrom agricultural sector. The revenue fell to 18.8 percent in 1980s. This was due to the fall in the international price of crude oil. There was an increase in revenue to 35.0 percent in 1990s because of an increase in international price of crude oil attributed to Gulf war. In 2000s, the revenue experienced a fall to 19.6 percent. This fall was due to continuous illegal activities of the militant Youth in the Niger Delta area of Nigeria which reduced the crude oil production during the period.


Government expenditure have positive contribution to the economy during the period in review (1960 – 2000). The contribution of the expenditure to the GDP throughout the period was positive. This confirmed the persistent deficit financing by the government during the period in review.



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